Evening Market Update

Oil Price Swings Leave Equity Markets Mixed

US stocks appeared to be headed for a third-straight day of significant losses, but reversed course in the afternoon to finish mixed. The rally coincided with a sharp downturn in the price of crude oil, possibly due to unconfirmed rumors of the shooting of Libyan leader Muammar Gaddafi. On the domestic economic front, a mixed report on durable goods and a drop in new home sales seemed to overshadow a larger-than-forecasted drop in weekly initial jobless claims, leading Treasuries higher. In equity news, General Motors beat on the top- and bottom-lines, Priceline.com exceeded the Street’s earnings forecast, Kohl’s matched expectations, while Target fell short of analysts’ revenue and profit estimates.

The Dow Jones Industrial Average lost 37 points (0.3%) to 12,068, the S&P 500 Index fell 1 point (0.1%) to 1,306, and the Nasdaq Composite was 15 points (0.5%) higher at 2,738. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. Crude oil fell $1.64 to $96.46 per barrel, wholesale gasoline fell $0.02 to $2.70 per gallon, while the Bloomberg gold spot price decreased $11.78 to $1,399.93 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% lower at 77.10.

Priceline.com Inc. (PCLN $462) reported 4Q EPS ex-items of $3.40, above the $3.09 analyst estimate, with revenues increasing 35% year-over-year (y/y) to $731 million, compared to the $735 million that was expected on the Street. The online travel booking company said gross bookings increased 44.2% y/y and its international operations posted revenue growth of 68.2% y/y. The company issued 1Q 2011 guidance that exceeded forecasts. Shares traded sharply higher.

General Motors Co. (GM $33) posted 4Q EPS ex-items of $0.52, above the $0.46 consensus estimate of analysts surveyed by Reuters, with revenues of $36.9 billion topping the $33.0 billion the Street had expected. Shares finished lower despite the results, as the automaker did not offer much in terms of guidance and some analysts noted that the company’s earnings before interest and tax expenses (EBIT) was below expectations.

Target Corp. (TGT $52) announced 4Q earnings excluding a $0.07 income tax benefit of $1.38 per share, below the $1.40 that analysts anticipated, with revenues increasing 2.8% y/y to $20.3 billion, short of the $20.8 billion that was expected. The company said its same-store sales—sales at stores open at least a year—rose 2.4% y/y. TGT traded to the upside, as the company said it is in position for “profitable growth in 2011 and many years to come,” and its credit card segment posted a solid decline in 4Q bad debt expense, due to lower write-offs and a reduction in the allowance for doubtful accounts.

Kohl’s Corp. (KSS $54) achieved 4Q profits of $1.66 per share, inline with analysts’ forecasts, as revenues, which grew 6.3% y/y to $6.0 billion, also came in roughly where the Street had expected. Same-store sales at the department store rose 4.3% y/y. KSS issued disappointing full-year EPS guidance, but the retailer announced its first cash dividend in its history, paying a quarterly return to shareholders of $0.25 per share, while also increasing its share repurchase program by $2.6 billion. KSS moved higher. 

New home sales fall, durable goods orders mixed, but jobless claims below expectations

New home sales fell 12.6% month-over-month (m/m) in January to an annual rate of 284,000 units, below the 305,000 rate forecasted and December’s figure was downwardly revised to a 325,000 annual unit rate. The median home price rose 5.7% year-over-year but fell 1.9% m/m to $230,600. Inventory of new homes for sale fell to 188,000 units, the fewest since December 1967 according to Bloomberg, representing 7.9 months of supply at the current sales rate. New home sales are considered a timelier indicator of conditions in the housing market than existing home sales, as they are based on signings instead of closings. New home sales remain near the all-time low of 274,000 reached in August 2010. January’s decline was paced by a 37% drop in the West after surging 63% in December, as buyers in California could qualify for an incentive worth as much as $10,000 if they signed a contract by the end of 2010.

Despite improvement in the overall economy, the aftereffects of the housing bubble burst are still being felt. New home sales face competition from discounts offered by foreclosures on existing homes and still tight credit standards for mortgages are giving all-cash buyers and investors the upper hand in negotiating prices. The number of mortgages under water continues to grow, at 27% in the fourth quarter, up from 23% the prior quarter, according to Zillow.com, and RealtyTrac believes lenders will foreclose on more homes in 2011 than 2010, but that 2011 could see the peak in foreclosures.

Durable goods orders rose by a slightly smaller-than-forecasted rate, increasing 2.7% m/m in January, compared to the 2.8% increase expected, and December’s figure was favorably revised to a 0.4% drop from a 2.5% decline. However, ex-transportation, orders unexpectedly fell, dropping 3.6%, compared to the expectation of a 0.5% rise, but December’s figure was adjusted solidly upward to a 3.0% increase, after the initial 0.5% gain reported. Meanwhile, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, tumbled by 6.9% in January, compared to the 1.0% decrease that was anticipated, but December’s figure was upwardly revised to a gain of 4.3%, from an initially reported 1.4% increase. Orders for durable goods, those expected to last at least three years, can be very volatile on a m/m basis, and today’s report follows the trend over the past three years of a drop in orders during the first month of a quarter.

Meanwhile, weekly initial jobless claims fell by 22,000 to 391,000, versus last week's figure which was upwardly revised by 3,000 to 413,000, and below the 405,000 level that economists had expected. The four-week moving average, considered a smoother look at the trend in claims, declined by 16,500 to 402,000, and continuing claims dropped by 145,000 to 3,790,000, below the forecast of economists, which called for continuing claims to come in at 3,880,000.

Treasuries moved higher amid the continued uneasiness toward the Middle East and following the economic data, as the yield on the 2-year note was 1 bp lower at 0.74%, the yield on the 10-year note fell 4 bps to 3.45%, and the 30-year bond yield declined 4 bps to 4.54%.

German GDP matches estimates, consumer confidence up in the euro-zone 

On the economic front across the pond, Germany reported 4Q GDP that matched expectations, as output increased 0.4% quarter-over-quarter (q/q), France’s consumer confidence remained unchanged as expected, while the number of French jobseekers fell 0.7% in January. Additionally, Italian retail sales rose at a m/m rate that was inline with forecasts, while a separate business confidence indicator in the nation unexpectedly deteriorated. Meanwhile, euro-zone consumer confidence improved by an amount that was anticipated, while its economic confidence improved by a larger-than-projected rate.

In Asia/Pacific, Australia released a report showing the nation’s Leading Index increased in December, South Korea’s consumer confidence deteriorated, and Hong Kong’s trade deficit narrowed by a larger amount than forecast, due to a jump in exports. Meanwhile, equity markets in China were aided by the announcement that government will allow an increase in the amount corporate pension funds will be able to invest in stocks, per Reuters.

Back in the Americas, the Brazilian unemployment rate increased to 6.1% in January, up from 5.3% in December and slightly higher than the 6.0% rate forecasted by economists.

Second look at 4Q GDP due out tomorrow

Tomorrow brings the second look at 4Q Gross Domestic Product, the broadest measure of economic output, forecasted to be revised up to 3.3% from a 3.2% quarter-over-quarter (q/q) annualized rate, an acceleration from the 2.6% rate experienced in 3Q. The anticipated upward revision to GDP comes despite an expected downward revision to personal consumption to 4.2% from the initially reported 4.4%. Inflation readings are expected to be unchanged, with the GDP Price Index coming in at a mere 0.3% gain, and the core PCE Index, which excludes food and energy, forecasted at an increase of 0.4%.

The other release on the US economic calendar is the final University of Michigan Consumer Sentiment Index reading for February, expected to be revised higher to 75.4 from the initial reading of 75.1, and relative to January’s 74.2 reading.

International releases will include CPI readings out of Japan and Germany, French consumer spending, detailed UK 4Q GDP figures, Singapore’s industrial production, and Mexico’s unemployment and 4Q GDP.